The federal government is sounding out the possibility of introducing a MySuper-style default product requirement, comparison tool and performance test package for super funds in the retirement phase as it cracks down on funds for perceived slow progress on helping members retire.
In a 31-page discussion paper released on Monday, Treasury outlined potential new policies in three areas of focus: helping members navigate retirement income, supporting funds to deliver better strategies, and making lifetime income product more accessible.
“We want to ensure super delivers on its foundational promise of providing a dignified retirement for more Australians,” said Treasurer Jim Chalmers and Minister for Financial Services Stephen Jones in a joint media statement.
One of them was a standardised “first offer” retirement product that will balance a set of desirable features, including around flexibility, risk management and income. It could include longevity protection measures such as deferred guaranteed income stream, or forward-planned income stream according to members’ preferences.
While acknowledging the default product won’t be suitable for all retirees, the paper said it should provide a solution for less engaged members while retaining choice for them.
Meanwhile, a retirement product equivalent for the Your Future Your Super (YFYS) package is officially on the government’s agenda. It followed reported comments from APRA’s chair John Lonsdale during an industry roundtable earlier this year that with the YFYS’ success in the accumulation phase, a similar arrangement for retirement won’t be “that big a step”.
The paper listed the YourSuper comparison tool and the performance test as two effective ways in the accumulation phase to rule out underperforming products and funds and would help members make more informed choices.
However, the paper iterated that if both were to be established in retirement, the industry needs to establish better disclosure practices (including universal comparison metrics) and “careful assessment of the unique challenges present in the retirement phase”, such as liquidity and longevity risks.
If established, a standardised product disclosure framework will require funds to publish basic information on their retirement products (such as expected income and risk management) and performance elements (such as fees and investment performance).
Funds will also need to elaborate on how they fulfill their covenant obligations, but will have flexibility around ways of implementation.
“Appropriate performance metrics will differ from accumulation phase performance assessment,” the paper said.
“The complexity and individuality of retirement income approaches may make comparisons and assessments difficult, including in relation to retirement income strategies where there are a range of good approaches funds could be taking.”
Informed by Conexus Institute’s research, the paper also proposed alternative disclosure practices such as introducing a scorecard that evaluates how products balance the three retirement income covenant objectives and other metrics, or measuring retirement strategies against a combination of quantitative checklists.
The number of retirees with a super account is set to double in the next decade with an estimated 2.5 million Australians retiring. However, the paper indicated that there’s confusion around retirement products, such as the minimum drawdown rate, which was often mistaken as a recommendation or default and could be revised to “better reflects retirees’ expenditure needs”.
Funds are also urged to improve guidance, education and communication for members, such as by “nudging” their members to consider their arrangements before they reach the retirement age or providing guidance through a service similar to the UK’s PensionWise.
Industry players including Vanguard Super have welcomed the discussion paper. Managing director of Vanguard Investments Australia, Daniel Shrimski, said: “While Vanguard Super is a new superannuation fund, as the US market leader in target date funds, improving retirement outcomes for individuals has been a focus for The Vanguard Group from early on.
“Australia’s superannuation system is strong and evolving to address identified challenges, but there is room for the industry on the whole to improve retirement outcomes and better ensure Australians are retiring confidently.”
The Association of Superannuation Funds of Australia (ASFA)’s interim CEO, Leeanne Turner said: “the take up of retirement income products offering protection against the financial consequences of longevity has been modest to date.
“What is needed is the removal of any remaining regulatory barriers to the development of such products.”
The consultation paper is open for submissions until 9 February 2024.
